Washingtonpost.com

Saturday, February 8, 2003

States Would Gain Control Over Services; Funds for Some Programs Would Be Cut

By Amy Goldstein and Jonathan Weisman
Washington Post Staff Writers

President Bush has embarked on a far-reaching campaign to transform the federal government's relationship with the nation's poor, seeking to tip control over social services to the states, reduce the funding of some programs, and require more proof that low-income people are eligible for public help.

The $2.23 trillion budget that Bush proposed to Congress last week would loosen federal standards and hand states vast new authority, if they want it, over housing subsidies, unemployment benefits, health insurance, and a preschool program for children from disadvantaged families, which is known as Head Start. It would also make outright cuts in some poverty programs, such as a reduction by a fourth in the amount the government devoted last year to "community services" grants for dispossessed neighborhoods.

At the same time, the president is seeking nearly $1.5 trillion in tax cuts that would largely benefit the wealthy while potentially squeezing social spending for years to come. White House officials contend that such cuts would ultimately help the poor more than direct government aid because they are supposed to spur faster economic growth, which would raise wages and pull more people into the workforce. In effect, they say, pro-investment tax policy is Bush's boldest anti-poverty program.

"Small changes in long-term growth have very large effects on our standards of living," said R. Glenn Hubbard, chairman of the White House's Council of Economic Advisers. "Once you realize that, everything else is secondary."

Affecting many federal agencies, the changes Bush wants to make in anti-poverty efforts reveal a bold aspect of his vision of government that he seldom discusses publicly. The proposals were not among the positions he staked out during the 2000 presidential campaign.

Aside from a plan to redesign the health insurance program, Medicaid, administration officials have drawn scant attention this year to their policies for addressing poverty as they released a budget that concentrates on defeating terrorism and building the economy. The president has not even publicly acknowledged this year's most dramatic tax proposal -- a plan to establish new savings accounts that would allow families to shield tens of thousands of dollars a year from all capital gains, interest and dividend taxation.

All of these policies are, in a sense, ideological heirs to previous conservative attempts to spur economic growth through the tax code and to limit the federal role in social welfare -- starting with President Ronald Reagan two decades ago and surging again in the mid-1990s, when congressional Republicans tried to "devolve" many federal responsibilities to the states.

Compared with the earlier efforts, Bush's approach is more subtle and less uniform. The most recent major anti-poverty program that was moved away from federal control -- the welfare system -- was converted into a "block grant" for every state in 1996. In contrast, administration officials this year emphasize that each state should have a choice whether to take part in the changes the White House intends for Medicaid and for Head Start. And the administration wants to keep tight federal rules in certain programs for the poor, such as by increasing the number of hours that parents on welfare are required to work.

Despite those differences, policy analysts across the ideological spectrum say that the changes imbedded in Bush's budget, if adopted, would be virtually unrivaled in scale and scope. "Just the sheer volume of proposals . . . across an array of low-income programs . . . is breathtaking," said Mark Greenberg, policy director of the Center for Law and Social Policy, a nonprofit group that specializes in family and welfare issues.

The changes require approval from Congress. Democrats have indicated that they will try to block several of them, including the plans for Medicaid and Head Start; debate over others has not yet begun.

The tax policies are already facing criticism, not only from Democrats, but also from some Republicans who worry that they are too ambitious and too costly. Democrats and many economists argue that the tax plans would spur far less growth than the administration contends, while widening the gap between rich and poor.

Senate Democrats last week asked Treasury Secretary John W. Snow whether the tax policies were "trickle-down economics," a reference to the Reagan tax cuts that were derided by critics because of their proponents' assumption that the benefits given to the rich would trickle down to the poor. Snow responded that he prefers to call them "circular" economics.

Affluent investors would help business managers, who would then help workers. Worker productivity would then boost investment returns and spur still more investment, he said.

Jay Lefkowitz, director of the White House's Domestic Policy Council, said: "The president believes that we are a compassionate society, and we are a society of great wealth, and we should use that wealth to really help people who have been left behind." But, Lefkowitz said in an interview, "[it] is not just a question of money." He said the budget "makes sure those resources are targeted toward proven programs or innovative ways to develop programs that work."

For several of the nation's largest social welfare programs, the budget would not cut funding but would restrict the federal responsibility for how they are run and who receives help. This strategy, Lefkowitz said, reflects Bush's belief that states "often . . . are the best able to develop programs that respond to the needs of their constituents," while the federal government must hold states accountable for the results.

Some experts on social policy say such a strategy is risky at a time when most states are economically strained.

"Offering state block grants in the middle of the most severe state fiscal crisis we've seen in a long time -- with little or no new federal aid -- almost guarantees that states will either fail to take up the option or that they will use the money in inappropriate ways," Isabel V. Sawhill, a senior fellow at the Brookings Institution, said at a gathering of policy analysts held to assess the budget.

Specifically, the most massive switch to state control favored by the administration would involve Medicaid, the 1960s health insurance program that is run jointly by the federal government and the states. The administration wants to unfetter states from virtually all federal rules for about a third of the 44 million people in the program -- people who are enrolled by the states' choice rather than by federal law.

For that group, including many children and elderly people, states could drop some benefits, provide varying forms of coverage in different communities, charge patients more for their care, and create waiting lists if they decide not to cover everyone who asks for help.

While those "optional" patients would be affected most directly, the administration also wants to make fundamental financial changes that ultimately could affect everyone on Medicaid. States could combine money for Medicaid and a separate insurance program for children, potentially to cover more adults.

Most significantly, for the first time, the federal government would stop paying for a share of the care for every patient who is enrolled. Instead, states would get a fixed payment that would be adjusted every year based on changes in the cost of health care -- but not fluctuating, as subsidies do now, depending on the number of patients, according to Dennis Smith, the Department of Health and Human Services' Medicaid director.

The prospect has alarmed liberal policy specialists and congressional Democrats. "It's a mind-boggling change," said Cindy Mann, a research professor at Georgetown University who was a health official in the Clinton administration. "It's basically shifting the responsibility to states and capping the federal dollars."

Aides to Bush say the Medicaid plan would not be a true block grant because it would be voluntary for states and because their subsidies would change from year to year.

The administration, however, is labeling as a block grant a fundamental change proposed in subsidies that currently help about 3 million poor families afford to rent privately owned apartments. The proposal would convert into state grants about three-fourths of the $17 billion in the program, known as Section 8.

Administration officials say the shift would enable states to design housing programs best-suited to their residents, such as by allowing more money for rent in high-priced areas and linking housing policies to welfare and other social services.

But low-income housing advocates worry that some states are ill-prepared to run housing programs and that others might make changes Congress had rejected -- such as placing time limits on housing assistance or denying assistance to people on welfare who fail to follow a program's rules.

Other aspects of federal aid for housing are targeted for cuts and, in a few instances, elimination. The Hope VI program, which spent nearly $5 billion in the past decade to demolish about 115,000 dilapidated public housing units and to build 60,000 dwellings, would not be renewed. Administration officials cite it as an example of programs that can end because they have already fulfilled their intended purpose.

The impact of other proposed changes are less immediately evident. Bush is proposing to tighten the process for determining who qualifies for two important forms of government help: the earned-income tax credit (EITC) for the working poor, and free and discounted meals for children in school.

In a new part of the budget that attempts to rate different parts of the government, the EITC is deemed "ineffective," the lowest rating, on the grounds that the Internal Revenue Service believes that 27 percent to 32 percent of the people who got the credits in 1999 were not truly eligible for them. Among other changes, the administration proposes to postpone refunds to families it believes are particularly likely to misstate their income or make mistakes.

Similarly, the administration wants to weed out children who improperly receive school lunch subsidies. Barry Sackin, a vice president of the American School Food Service Association, said that he, too, thinks only eligible students should receive free meals, but that some of the methods the administration is contemplating would cause "collateral damage," mistakenly denying help to children who should get it.